Japanese Banks’ Desperate Hunt for Yield Draws More Scrutiny

(Bloomberg) -- Japan’s financial regulator is keeping a closer watch on the nation’s banks and insurers as their drawn out hunt for yield pushes them into riskier non-traditional assets.

After years of ultra-low interest rates and record levels of deposits, it’s “inevitable” that firms are taking bigger risks, according to Toshinori Yashiki, who’s in charge of assessing risk at banks and insurers at the Financial Services Agency. 

“The situation is getting worse,” Yashiki, 56, said in an interview. “There have been moves to pursue yields,” and financial firms “have to take risks they haven’t taken before.”

Regulatory officials in Japan are treading a fine line between supporting an environment where financial firms seek out investments that offer higher returns, while guarding against excessive risk taking. Some lenders are turning to riskier offerings to make a return on deposits that ballooned during the pandemic. 

The FSA assessed potential lapses in risk management at three Japanese financial firms earlier this year after they were hit by the implosion of New York-based family office Archegos Capital Management LP.

Instead of clamping down on the risks institutions are taking, the regulator is asking more questions about how they’re making these investments such as: “Are you properly evaluating risks and returns? Is the size of risk appropriate for your capital or profit?” he said. 

Yashiki, who started his career at the Bank of Japan, said the hunt for yield isn’t limited to securities, and extends to real estate non-recourse loans and leveraged buyout loans. “Rather than finding risks of specific products, we would first like to focus on whether the proper process and systems are in place to evaluate risks,” he said.  

Japanese banks and insurers now hold fewer government bonds in their portfolio, while the share of foreign securities and investment trusts has been rising. Securitized products and privately-placed bonds are also on the increase, although not significantly, Yashiki said.

Japan’s 107 banks held about 238 trillion yen ($2.1 trillion) of securities in the year ending March, up 20% from a year earlier, according to credit-research company Tokyo Shoko Research. The level of deposits and loans rose 10% and 3.3%, respectively, over the same period.

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